The sense that the Australian economy has lost momentum placing pressure on 2008 earnings was reinforced yesterday by the latest National Australia Bank survey of business conditions and confidence.
The survey said the economy could be reaching a turning point, despite domestic demand in the December quarter still travelling at a "robust" 4%.
The survey said the results suggest "the peak may have passed and that, going forward, activity will continue to slow in the face of higher interest rates, a strong currency and continuing problems in global financial markets (which as well as increasing funding costs raises doubts about global growth prospects."
The results and points suggested add to the impression from last week when retail sales, building approvals and housing finance for October showed sharp falls; while in the last September quarter official statistics, private new capital spending and corporate profits were surprisingly lower and business stocks surprisingly higher.
But while the NAB still thinks the economy has peaked, it says the economy is still doing well.
It's just there seems to have been a change in momentum, as shown by the fall in business confidence in November to the lowest level in almost a year.
Higher interest rates and the fallout from global financial market turmoil and credit crunch appear to have been the drivers behind the NAB's confidence index dropping 3 points to 6 in November from October. (A reading above zero shows those expecting business to improve outnumber those predicting a deterioration.)
Jeff Oughton, a senior economist at the NAB said in a statement that "The recent tightening in domestic financial conditions, monetary policy, as well as global financial turbulence appear to have to have taken their toll".
But he said that despite this weakening "Overall, however, the survey continues to point to relatively robust ongoing business conditions".
The bank's business conditions gauge fell 5 points to 15, after climbing to a record in October. (A reading above zero indicates more companies say earnings, sales and hiring were good last month than those reporting they were poor).
That fall in business conditions was led by falls in two of the three components – trading (down seven points to 21) and profitability (down eight to 14).
Employment was the only category to increase in the survey, up two points to plus 12.
Labour costs in the three months to the end of November rose 1.4% and the annual increase in wage costs was steady at 5.4%
The NAB said that "Wage pressures remained steady and high in November, and appear to have been pushed higher of late by domestic-focused sectors of retailing, wholesaling and manufacturing'', while annual inflation will be 3.5% in "early 2008'' before higher borrowing costs push the rate down to 3% by the end of next year. That's the forecast from the Reserve Bank last week.
The fall in business confidence appears to have been come from interest rate-sensitive sectors such as finance and business services the main contributors.
A change of government was also responsible for a sentiment of business uncertainty, according to a special question in the survey.
"The survey asked if a change of government was likely to add or detract from their business expectations and 22 per cent saw potential negative impacts, compared to only five per cent who expected the incoming Rudd government to be positive for their business. The most concerned sectors were mining, agriculture, transport and construction."
The NAB said that "Business conditions for the non-farm business sector as a whole eased in November – slightly lower than earlier quarterly expectations for the December quarter as a whole.
"Based on the historical relationship with business conditions, annual growth in real non-farm GDP (the Statistician's measure of real income/output) looks to be running around 4% in the year to November – a bit below the Statistician's latest reading for the September quarter. Strong public spending, however, has also boosted the latter.
"The loss of upward momentum in conditions points to a peak in growth.
"Marked differences continue in business conditions across industries and states – albeit there have been signs of some recent convergence.
"In trend terms, conditions across most states continued to decline in November. WA & to a lesser extent Queensland continued to report relatively stronger conditions than other states. Since mid-year, very strong conditions in WA have eased – although continued to remain higher than other states. SA has recorded the sharpest declines whilst conditions in other states are broadly similar to conditions mid year.
"By industry, the key feature is the strengthening in the domestic-focused sectors over recent months – especially, in retailing (excluding cars), wholesale, manufacturing (ex agribusiness) and construction. That said, construction, retail and wholesale have moderated slightly in November.
"Furthermore, external concerns about fragile global financial markets have led to a slight weakening in finance/property/business services sector – although still remaining strong. The mining sector also deteriorated, although still remains at very robust levels.
"The transport sector on the other hand recorded the strongest improvement in conditions in November, the NAB said. That showed up in the National Accounts.
"Recreational & personal services continues to remain weak- arguably hit by a rising $A & oil prices, horse flu and smoking bans."
